Tag: Internal Controls

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Ten Top Lessons from Recent FCPA Settlements – Lesson No. 9, Internal Controls

Over the past 15 months, the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have made clear, through three Foreign Corrupt Practices Act (FCPA) enforcement actions and speeches, their priorities in investigations, remediations, and best practices compliance programs. Every compliance professional should study these enforcement actions closely for the lessons learned and direct communications from the DOJ. They should guide not simply your actions should you find yourself in an investigation but also how you should think about priorities.

The three FCPA enforcement actions are ABB from December 2022, Albemarle from November 2023, and SAP from January 2024. Taken together, they point out a clear path for the company that finds itself in an investigation, using extensive remediation to avoid monitoring and provide insight for the compliance professional into what the DOJ expects in an ongoing best practices compliance program.

Over a series of blog posts, I will lay out what I believe are the Top Ten lessons from these enforcement actions for compliance professionals who find themselves in an enforcement action. Today, we continue with Number 9, Internal Controls. The DOJ has made it clear that any organization under FCPA scrutiny must use its internal controls to continuously test, monitor, and improve all aspects of its compliance program.

SAP

As a part of its remediation, the company conducted a gap analysis of internal controls. This remediation found those internal controls “lacking.” SAP also undertook a “comprehensive risk assessment focusing on high-risk areas and controls around payment processes and enhancing its regular compliance risk assessment process.” Using this risk assessment as a starting point, the company performed a gap analysis, determined the overall remediation regime needed, and effectuated that remediation. 

ABB

The ABB Plea Agreement reported that ABB “performed a root-cause analysis of the conduct at issue. From there, the company revamped its internal controls, investing significant additional resources in control testing and monitoring throughout the organization. While not often seen as a part of internal controls, the company restructured its reporting by internal project teams to ensure compliance controls oversight.

Additionally, ABB essentially created its monitoring program around controls, testing its compliance program, and reporting to the DOJ. In the “Written Work Plans, Reviews, and Reports” section, ABB agreed to conduct a first review and prepare a report, followed by at least two follow-up reviews and reports. But more than simply reporting on control testing, ABB agreed to create and submit for review a work plan for this ongoing testing of its compliance program, as the program was detailed in the DPA. The DPA specified, “No later than one (I) year from the date this Agreement is executed, the Company shall submit to the Offices a written report setting forth:

  • a complete description of its remediation efforts to date;
  • a complete description of the controls testing conducted to evaluate the effectiveness of the compliance program and the results of that testing; and
  • It proposes to ensure that its compliance program is reasonably designed, implemented, and enforced so that the program is effective in deterring and detecting violations of the FCPA and other applicable anti-corruption laws.”

The bottom line is that all these companies worked very hard to significantly enhance their controls, testing, and monitoring and then improve based on that information. None of the actions taken by these companies were particularly new or even innovative. Indeed, these strategies have been available from the DOJ since at least the first edition of the FCPA Resource Guide in 2012. It was, however, the work by the company to understand the deficiencies in their internal controls regime and their superior efforts to upgrade them.

Albemarle

The Albemarle SEC Order was instructive regarding internal controls for a different reason than we have been considering throughout this series. The Order detailed a series of internal control failures by the company across multiple business units in several other countries. The entire story painted a picture of a company that did not have adequate or easily overridden internal controls.

Vietnam. The Order noted, “Albemarle’s system of internal accounting controls was insufficient to prevent or detect these improper payments, which Albemarle Singapore falsely recorded as legitimate commissions in books and records consolidated into Albemarle’s financial statements.”

India. A backdated agreement increased an India agent’s commission multiple times without compliance oversight or approval. Commissions went from “extremely high” to “far from any possible realistic justification.” Finally, “the agreement called for payment of a three percent commission to India Agent, a rate three times higher than that paid to Albemarle’s existing agent for India.”

Indonesia. Albemarle’s system of internal accounting controls was insufficient to prevent or detect the improper payments made to and through Indonesia Agent, which Albemarle Singapore falsely recorded as legitimate commissions and business expenses in books and records consolidated into Albemarle’s financial statements.”

China.  When an Albemarle business director questioned China Agent’s compensation as “high,” an Albemarle Netherlands business director provided the business justification that he anticipated significant returns on the contract.

UAE.  No due diligence was conducted on an agent until after the agent agreement had been executed. The agent provided no discernible services other than conveying confidential tender evaluations and competitors’ bids obtained from the customer.

Each of these resolutions drives home the importance of internal controls, creation, and remediation as a key part of your overall compliance regime during any investigation. The sooner you can start on your internal controls, the better off you will be in your negotiations with the DOJ and SEC.

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Compliance Into the Weeds

Compliance into The Weeds: Compliance and Internal Controls in The Trump Organization

The award-winning Compliance into the Weeds is the only weekly podcast that takes a deep dive into a compliance-related topic, literally going into the weeds to more fully explore a subject. Looking for some hard-hitting insights on compliance? Look no further than Compliance into the Weeds! In this episode, Tom and Matt look at the Trump Organization Monitor and Independent Director of Compliance required in the trial court order.

The topic of internal controls within the Trump Organization has recently come under scrutiny, with the need for improved financial practices and systems of accounting control becoming increasingly apparent. Tom views internal controls as the backbone of financial reporting and compliance. He points out the inconsistencies and errors in the Trump Organization’s financial disclosures, emphasizing the need for accurate certifications and attestations about the organization’s financial health. Similarly, Matt underscores the importance of consistent and accurate financial disclosures. He raises concerns about the lack of basic financial controls within the Trump Organization and sees the need for a significant overhaul of internal controls to ensure transparency, accuracy, and compliance with financial reporting standards. Both Fox and Kelly’s perspectives are shaped by their extensive experience in the field of compliance and their understanding of the critical role internal controls play in maintaining financial integrity.

Key Highlights:

  • Compliance Monitor’s Oversight in Fraud Detection
  • Navigating Financial Compliance in the Trump Organization
  • Implementing Effective Accounting Control Systems at Trump
  • Enhancing Financial Integrity in the Trump Organization

Resources:

Matt on Radical Compliance

Tom 

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Compliance Into the Weeds

Compliance Into The Weeds: Oscar Season and Internal Controls

The award-winning Compliance into the Weeds is the only weekly podcast that takes a deep dive into a compliance-related topic, literally going into the weeds to more fully explore a subject. Looking for some hard-hitting insights on compliance? Look no further than Compliance into the Weeds! In this episode, Tom and Matt take a deep dive into a payments and internal controls miasma involving actors Tom Holland and Tom Hollander.

The recent incident involving British actor Tom Hollander, who accidentally received a payment intended for Tom Holland due to a mix-up at their shared talent agency, has brought to light the critical importance of robust accounting controls for payments. Tom emphasizes the need for a second set of eyes to oversee payments and ensure they are going to the correct recipients. He suggests that smaller organizations can implement human review controls, while larger ones may need to rely on technology such as robotic process automation. Matt is highlighting the potential legal and regulatory consequences of sending payments to the wrong recipients. He stresses the need for organizations to demonstrate to regulators that errors are rare and accidental and that they have effective assurance processes in place. Join Tom Fox and Matt Kelly as they delve deeper into this topic in the latest episode of Compliance into the Weeds.

Key Highlights:

  • Payment Mix-up Highlights Importance of Internal Controls
  • Error Prevention and Correction in Payments
  • Mitigating Compliance Risks with Internal Controls

Resources:

Matt on Radical Compliance

Tom 

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Compliance Into The Weeds: The SAP Foreign Corrupt Practices Act Enforcement Action

The award-winning Compliance into the Weeds is the only weekly podcast that takes a deep dive into a compliance-related topic, literally going into the weeds to more fully explore a subject. Looking for some hard-hitting insights on compliance? Look no further than Compliance into the Weeds! In this episode, Tom and Matt take a deep dive into the recent Foreign Corrupt Practices Act (FCPA) enforcement action involving the ERP software giant SAP.

The recent $220 million fine imposed on German software giant SAP for violations of the FCPA underscores the critical role of internal audits in maintaining corporate compliance. Despite having a comprehensive FCPA compliance program, SAP’s lack of control over its subsidiaries led to bribery activities, a situation that Tom and Matt believe could have been prevented with a robust internal audit function. Fox emphasized the need for strong internal audits to identify and address issues within different parts of an organization. Similarly, Kelly underscored the importance of internal audits in identifying and rectifying control lapses. To delve deeper into this topic and understand the implications of the SAP case, join Tom Fox and Matt Kelly on this episode of Compliance into the Weeds. 

Key Highlights:

  • The bribery schemes and geographic scope
  • What is culture?
  • Third parties and corruption risks
  • The fine and penalty
  • The comeback
  • Lessons learned for the compliance professional

Resources:

Matt on Radical Compliance

Tom 

Tom on the FCPA Compliance and Ethics Blog

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31 Days to More Effective Compliance Programs

31 Days to a More Effective Compliance Program: Day 15 – Monitoring and Improvement of Internal Controls

What happens when controls are continually overridden? Does that necessarily mean that companies are engaging in activities that violate the FCPA or some other law, such as Sarbanes-Oxley (SOX)? Cristina Revelo said she would start out with some basic questions, such as “How often would something be manually approved? How often are controls skipped? What are the levels of approvals that you have and what is your documentation? What are the reasons? And are you documenting how often a certain department is requiring those overrides?” While it could indicate that a company lacks a culture of compliance or that everything is an emergency, it might mean something else. It might mean that your internal controls need to be evaluated and then recalibrated. The Department of Justice calls this continuous monitoring leading to continuous improvement. Joe Oringel, co-founder of Visual Risk IQ, calls it continuous control monitoring.

However, many compliance professionals, and particularly lawyers, think once a control is in place, it’s set in stone, and it’s there forever. This derives from the unfortunate fact that, once again, many compliance professionals and most lawyers do not understand internal controls. Yet, internal controls, much like the rest of a compliance program, can and should be continually monitored and improved based on information about such things as the number of overrides. Such a review can be evidence of a management problem or a culture of non-compliance at the organization. However, it could be that perhaps the controls need to be adjusted.

Revelo emphasized that it is not simply identifying the issues but remedying them as well, “because that actually might look worse if you identify a lot of issues, but do not fix them. You are better off by remediating everything you are identifying.” From there, you can conduct a root cause analysis as to why there was failure in a control or violation of a compliance procedure. Revelo concluded, “You need to really do that in an in-depth manner and then remediate.”

Three key takeaways:

1. An internal control override is not necessarily a bad thing if proper procedure is followed.

2. Internal controls are not set in stone.

3. The key is to have a process for monitoring the controls and taking input, literally from each line of defense.

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Monitoring and Improvement of Internal Controls

What happens when controls are continually overridden? Does that necessarily mean that companies are engaging in activities that violate the FCPA or some other law such as Sarbanes-Oxley (SOX). Cristina Revelo said she would start out with some basic questions, such as “How often would something be manually approved? How often are controls skipped, what are the level of approvals that you have and what is your documentation? What are the reasons, and are you documenting how often a certain department is requiring those overrides?” While it could indicate that a company lacks a culture of compliance or that everything is an emergency, it might mean something else. It might mean that your internal controls need to be evaluated and then recalibrated. The Department of Justice calls this continuous monitoring leading to continuous improvement. Joe Oringel, co-founder of Visual Risk IQ, calls it continuous controls monitoring.

However, many compliance professionals, and particularly lawyers, think once a control is in place, it’s set in stone, and it’s there forever. This derives from the unfortunate fact that once again many compliance professionals and most lawyers do not understand internal controls. Yet, internal controls, much like the rest of a compliance program can and should be continually monitored and continually improved based on the information about such things as the number of overrides. Such a review can be evidence of a management problem or a culture of non-compliance at the organization. However, it could be that perhaps the controls need to be adjusted.

How do you assess and then update your internal controls? Companies should also think about updating and reviewing their controls at least annually. In this manner, they can identify any violations of their internal controls. It also allows a deep dive into any specific areas of control failures. Another approach would be more robust controls through greater monitoring of your controls. For example, you could review your controls quarterly to allow you to spot any trends that are moving in the wrong direction. You can even start out by having your compliance function perform a self-review of its controls and test exemplar transactions. This is not a full-blown audit but simply desktop testing to make sure controls are being properly followed. Once again, simply because there is a control override or excessive use of a compensating control does not mean something is illegal. It may mean that the control is not working as it was designed.

Revelo said it could be an instance of “too short an approval time period and employees need a little bit longer because depending on their industry or how business works. This also helps to both identify frustrations from employees where there is a control, but every time it needs to be executed, it is impossible for me to do, or it’s impossible for me to comply with it a hundred percent.” These quarterly reviews can then be collated into an annual report for review and assessment and the report can form the basis of an annual report to the Compliance Committee of the Board of Directors or even the full Board.

The key is to have a process for monitoring the controls and taking input, literally from each line of defense. If a control is overridden too often, you need to change it. If a control is ineffective, you can use that information to craft a new internal control. Internal controls are not static, but dynamic and, with proper oversight, you can set up internal controls and literally improve them with appropriate documentation. (Hint-Document, Document, and Document.)

Revelo emphasized that it is not simply identifying the issues but remedying them as well “because that actually might look worse if you identify a lot of issues, but do not fix them. You are better off by remediating everything you are identifying.” From there you can conduct a root cause in that analysis as to why there was failure in a control or violation of a compliance procedure. Revelo concluded, “you need to really do that in an in-depth manner and then remediate.”

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31 Days to More Effective Compliance Programs

31 Days to a More Effective Compliance Program: Day 14 – Internal Controls

What are internal controls? The best definition I have come across is from Jonathan Marks, partner at BDO, who defined internal controls as:

An internal control is an action or process of interlocking activities designed to support the policies and procedures detailing the specific preventative, detective, corrective, directive, and corroborative actions required to achieve the desired process outcomes or objectives. This, along with continuous auditing, continuous monitoring, and training, reasonably assures:

• The achievement of the process objectives linked to the organization’s objectives;

• Operational effectiveness and efficiency;

• Reliable (complete and accurate) books and records (financial reporting);

• Compliance with laws, regulations and policies; and

• The reduction of risk fraud, waste, and abuse, which aids in the decline of process and policy variation, leading to more predictive outcomes.

The bottom line is that internal controls are just good financial controls. The internal controls that detail requirements for third-party representatives in the compliance context will help to detect fraud, which could well lead to bribery and corruption. As an exercise, map your existing internal controls to the Hallmarks of an Effective Compliance Program or some other well-known anti-corruption regime to see where gaps may exist. This will help you determine whether adequate internal compliance controls are present in your company. From there, you can move on to see if they are working in practice.

Three key takeaways:

1. Effective internal controls are required under the FCPA

2. Internal controls are a critical part of any best practices compliance program

3. There are four significant controls for the compliance practitioner to implement initially. (a) Delegation of authority (DOA); (b) Maintenance of the vendor master file; (c) Contracts with third parties; and (d) Movement of cash or currency

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Internal Controls

What are internal controls? The best definition I have come across is from Jonathan Marks, partner at BDO, who defined internal controls as:

An internal control is an action or process of interlocking activities designed to support the policies and procedures detailing the specific preventative, detective, corrective, directive and corroborative actions required to achieve the desired process outcomes or the objectives(s). This, along with continuous auditing, continuous monitoring and training reasonably assures:

• The achievement of the process objectives linked to the organization’s objectives;

• Operational effectiveness and efficiency;

• Reliable (complete and accurate) books and records (financial reporting);

• Compliance with laws, regulations and policies; and

• The reduction of risk-fraud, waste and abuse, which, aids in the decline of process and policy variation, leading to more predictive outcomes.

What specifically are internal controls in a compliance program? The starting point is the FCPA itself, which requires issuers to devise and maintain a system of internal controls that can reasonably assure:

1. Transactions are executed in accordance with management’s general or specific authorization;

2. Transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

3. Access to assets is permitted only in accordance with management’s general or specific authorization; and

4. The recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

The DOJ and SEC, in the 2020 FCPA Resource Guide, 2nd edition, stated:

Internal controls over financial reporting are the processes used by companies to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements. They include various components, such as: a control environment that covers the tone set by the organization regarding integrity and ethics; risk assessments; control activities that cover policies and procedures designed to ensure that management directives are carried out (e.g., approvals, authorizations, reconciliations, and segregation of duties); information and communication; and monitoring. … The design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption.

This was supplemented in the 2023 ECCP, with a pair of pointed questions: whether a company has made significant investigation into its internal controls and have they been tested, then remediated based upon the testing?

The whole concept of internal controls is that companies need to focus on where the risks—compliance or otherwise—are and then allocate their limited resources to putting controls in place that address those risks. In the compliance world, of course, your two biggest risks are 1) company assets or resources, marketing expenses, petty cash or other sources of funds being used to pay a bribe, and 2) diversion of company assets, such as unauthorized sales discounts or receivables and write offs used to pay a bribe.

There are four significant controls for the compliance practitioner to implement initially. They are:

1. Delegation of authority (DOA);

2. Maintenance of the vendor master file;

3. Contracts with third parties; and

4. Movement of cash/currency.

Your DOA should reflect the impact of compliance risk including both transactions and geographic location so that a higher level of approval for matters involving third parties, for fund transfers and invoice payments to countries outside the US would be required inside your company.

Next is the vendor master file, which can be a powerful preventative control tool largely because payments to fictitious vendors are one of the most common occupational frauds. The vendor master file should be structured so that each vendor can be identified not only by risk level but also by the date on which the vetting was completed and the vendor received final approval. There should be electronic controls in place to block payments to any vendor for which vetting has not been approved. Internal controls are needed over the submission, approval, and input of changes to the vendor master file.

Contracts with third parties can be a very effective internal control that works to prevent nefarious conduct rather than simply as a detect control. For contracts to provide effective internal controls, however, relevant terms of those contracts—including, for instance, the commission rate, reimbursement of business expenses, use of subagents, etc.,—should be made available to those who process and approve vendor invoices.

All situations involving the movement of cash or transfer of monies outside the US—including such methods as computer checks, manual checks, wire transfers, replenishment of petty cash, loans, and advances—should be reviewed from the compliance risk standpoint. This means identifying the ways in which a country manager or a sales manager could cause funds to be transferred to their control and to conceal the true nature of the use of the funds within the accounting system.

To prevent these types of activities, internal controls need to be in place. All wire transfers outside the US should have defined approvals in the DOA. The persons who execute the wire transfers should be required to evidence agreement of the approvals to the DOA, and wire transfer requests going out of the US should always require dual approvals. Lastly, wire transfer requests going outside the US should be required to include a description of proper business purpose.

The bottom line is that internal controls are just good financial controls. The internal controls that detail requirements for third-party representatives in the compliance context will help to detect fraud, which could well lead to bribery and corruption. As an exercise, map your existing internal controls to the Hallmarks of an Effective Compliance Program or some other well-known anti-corruption regime to see where gaps may exist. This will help you to determine whether adequate compliance internal controls are present in your company. From there you can move to see if they are working in practice.

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31 Days to More Effective Compliance Programs

31 Days to a More Effective Compliance Program: Day 3 – 2023 Evaluation of Compliance Programs: Messaging Apps, Internal Controls and Adequate Compensation

Messaging Apps

There was a significant addition to the language around messaging apps. The ECCP opened this section by noting, “Messaging applications have become ubiquitous in many markets and offer important platforms for companies to achieve growth and facilitate communication.” For any company under investigation or in a FCPA enforcement action, the DOJ will evaluate its “policies and mechanisms for identifying, reporting, investigating, and remediating potential misconduct and violations of law governing the use of personal devices, communications platforms, and messaging applications, including ephemeral messaging applications.”

Internal Compliance Controls

Under Section II, entitled Is the Corporation’s Compliance Program Adequately Resourced and Empowered to Function Effectively?  We find the new language, “In this regard, prosecutors should evaluate a corporation’s method for assessing and addressing applicable risks and designing appropriate controls to manage these risks.” This simple sentence packs quite a punch as it requires both appropriate internal compliance controls and then monitoring of those controls to see if they are managing the risks identified in the risk assessment.

Adequate Compensation and Salary/Bonus Review for Compliance

Under Section III, there is a significant new addition to the ECCP. It forces a company to adequately compensate those employees who investigate and pass judgment on misconduct. But it is more than simply adequate compensation, as it also requires a company not to retaliate via low salaries, limited raises, or other compensation for doing their jobs as compliance officers. In other words, if the CEO is being investigated by compliance, that same CEO should not be setting or reviewing the salary of the CCO or those doing the investigation. This mandates that the DOJ review the entire corporate organization on these issues.

Three key takeaways:

1. Communications compliance will be a key issue for compliance professionals going forward in 2024.

2. You must have both appropriate internal controls and ensure they are functioning.

3. In addition to adequate resources, a compliance function must be shown to adequately pay, promote, and protect those involved in compliance investigations.

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Nicholas Latham on Implementing Frameworks for Effective Risk Management in Organizations

I recently had the opportunity to visit with folks from Diligent. We look down the road at key issues in 2024 in a podcast series sponsored by Diligent entitled Compliance Professionals Adapting to Change: Industries, Regulations, and Beyond. I could chat with Nicholas Latham, Renee Murphy, Jessica Czeczuga, Yee Chow, and Alexander Cotoia. Over this series, we discussed compliance communications in regulated industries, managing conflicts of interest at the Board level, the Board’s role in compliance training and communications, navigating the current ESG landscape, and professional growth and mentorship in compliance. In this first blog post, we discuss accounting and risk management frameworks.

One of the key topics discussed in the episode was the importance of risk assessment frameworks in identifying and mitigating organizational risks. Latham highlighted two widely used frameworks, the COSO Framework for Internal Controls and ISO 31,000, which both provide a comprehensive approach to risk management. These frameworks help organizations establish effective communication processes and gain a holistic view of risk across different departments.

The COSO Framework for Internal Controls focuses on enterprise risk management. It emphasizes the need to assess an organization’s control environment, determine risk appetite, and identify crucial risks for the business’s success. Information and communication processes, including training and monitoring activities, are built around these assessments to ensure effective risk management.

We next discussed the relevance of the “Single Pane of Glass” concept, often associated with the COSO Framework for Internal Controls. This concept provides a unified view of an organization’s operations and risk management, flattening hierarchical structures and promoting transparency. By implementing this approach, executives and leaders can comprehensively understand what is happening across the organization rather than just within individual departments.

We noted the challenges associated with compliance communication issues, particularly in e-communications. Latham emphasized the importance of setting the tone at the top, with executive leadership emphasizing the criticality of compliance and its impact on the organization and its customers. Training plays a crucial role in ensuring compliance, but Latham noted that the amount and frequency of training in today’s environment may not be sufficient. He stressed the need for organizations to step up their training efforts and be prepared for increasingly stringent regulatory scrutiny.

Monitoring e-communications poses a significant challenge due to the sheer volume of interactions. Latham suggested leveraging artificial intelligence (AI) to analyze a larger communications sample and identify potential risks. This approach could help organizations identify improper processes, training gaps, or script issues that may contribute to compliance breaches.

As a compliance professional, your understanding of risk assessment frameworks, such as the COSO Framework for Internal Controls and ISO 31,000, highlights the importance of comprehensive risk management practices. The “Single Pane of Glass” concept and the challenges associated with compliance communication issues provide valuable guidance for organizations navigating the complex risk and compliance landscape. As regulatory scrutiny continues to increase, compliance professional’s expertise will continue to serve as a valuable resource for organizations seeking to enhance their risk management practices and ensure compliance in an ever-evolving technological landscape.

Ready for Purpose-Driven Compliance? Diligent equips leaders with the tools to build, monitor, and maintain an open, transparent ethics and compliance culture. For more information and to book a demo, visit Diligent.com

Join us tomorrow when we consider conflicts of interest at the Board of Directors.